The Concave Phillips Curve
This paper derives the curvature properties of the short-run Phillips curve in a class of canonical models of price-setting frictions. Contrary to conventional thinking, the Phillips curve is asymptotically horizontal for high levels of economic activity and asymptotically vertical for low levels of economic activity. Moreover, it is globally concave for a wide class of models, including many in which average real marginal cost is an unbounded convex function of economic activity. Intuitively, when economic activity is very high (low), substitution effects within the model-implied true price index imply that inflation behaves as if prices are nearly fully sticky (flexible). Using (conventional) measures of inflation that understate the relevant substitution effects may lead to misleading conclusions about the curvature of the Phillips curve, and to corresponding errors in the formulation of monetary policy.